Monday, July 26, 2010

Whistleblower Provisions ... What Others Are Saying

The FCPA bar is an active group of writers.

And quick.

Below is a sample of other views on the whistleblower provisions of the Dodd-Frank financial reform bill signed by President Obama last week.

As noted in this prior post, the whistleblower provisions apply to all securities laws violations and the FCPA is part of the Securities Exchange Act. In the post, I set forth my reasons for why I believe the new whistleblower provisions will have a negligible impact on FCPA enforcement. As demonstrated by the below snippets, I am clearly an outlier, which is not surprising to me.

So if you have an unexplained fascination for law firm client alerts (as I often do) this post is for you.

"The Act's broad whistleblower provisions significantly increase the compliance risks companies doing business internationally face. Coupled with the fact that numerous recent FCPA enforcement actions have resulted in companies paying record fines — in many cases in the tens or even hundreds of millions of dollars — to settle enforcement actions, the Act will create enormous financial incentives for individual whistleblowers to report FCPA violations (or even speculative claims of a violation) to the SEC. Given this important legislative development, there is no better time for companies to evaluate their FCPA compliance programs to ensure they are in line with current best practices. An effective FCPA compliance program both minimizes a company's risk of violations and provides protection to companies by maintaining the components of an effective compliance and ethics program set forth in the U.S. Sentencing Guidelines."

"Although the new provisions apply to all violations of the securities laws, they are likely to have particularly significant impact on enforcement of the Foreign Corrupt Practices Act (“FCPA”), an area in which criminal and civil penalties and enforcement activity have increased sharply in recent years."

"Although Dodd-Frank’s whistleblower provisions apply to any of the securities laws under which the SEC can bring enforcement actions, the Act will likely have an immediate and outsized impact on FCPA enforcement."

"Given the large size of recent FCPA settlements and enforcement actions, the ability to aggregate the recoveries from “related judicial and administrative actions” when determining the whistleblower’s award, and the government’s continued focus on and increased resources devoted to FCPA enforcement, the Dodd-Frank whistleblower provisions are likely to result in even more FCPA investigations and enforcement actions."

"The new whistleblower provisions could lead to more and/or earlier voluntary disclosures of potential securities law violations, as companies hoping to obtain the benefits of voluntary disclosure must move quickly, before the whistleblower makes his or her disclosure. They could also lead to more reports of minor violations previously deemed not significant enough to report."

"While the whistleblower bounty exists for all securities violations, the risk companies face is particularly great relative to the Foreign Corrupt Practices Act (“FCPA”), which broadly proscribes corruptly influencing foreign public officials. The remarkable monetary sanctions in FCPA enforcement actions, where SEC settlements in the tens or even hundreds of millions of dollars have become increasingly common, provide a compelling incentive for individuals to contact the SEC about suspected FCPA violations."

"The dramatic increase in FCPA enforcement efforts, along with the comprehensive press coverage surrounding such efforts and the expected cottage industry of lawyers and others, will ensure that potential whistleblowers are aware of, and take full advantage of, this enticing incentive."

"The increased possibility that FCPA violators will face substantial sanctions (for violations that may have been “under the radar” previously) also suggests that companies have even greater reason to inhibit bribery and fraud from occurring in the first place. The importance of effective internal controls and compliance programs to detect and prevent FCPA and other securities violations has intensified. With the new bounty, companies will need to adapt to this defining change in the legal landscape."

"In light of the current aggressive FCPA enforcement environment, Section[] 922 [...] stand to further increase the number of FCPA-related investigations initiated by corporate counsel and U.S. enforcement authorities, as well as the number of civil and criminal enforcement actions brought by the SEC and U.S. Department of Justice (“DOJ”). Before the Act is signed into law, companies doing business overseas—particularly publicly traded companies in the oil, natural gas, or minerals industries—should take the time to review their compliance policies and procedures and determine what, if any, changes must be made to account for the changing enforcement landscape as a result of the Dodd-Frank Act."

"In light of Section 922 and the financial incentives it provides, companies should expect an increase in whistleblower allegations and associated investigations—particularly in the context of the FCPA, where several recent civil and criminal recoveries have been $100 million or more. This expectation will also affect companies’ determinations regarding self-reporting, should allegations arise, both in terms of whether to self-report the allegations and how quickly to do so (e.g., before an internal investigation has been conducted). At the very least, companies should reassess internal compliance policies and procedures to ensure their adequacy in anticipation of such increased enforcement activity."

"When combined with recent efforts to step up enforcement, these new provisions significantly alter the incentives for potential whistleblowers, making it more likely that those on the fence will race to government, rather than report to their employer. Take the Foreign Corrupt Practices Act as an example. In the past few years, both the SEC and the U.S. Department of Justice (DOJ) have dramatically increased their enforcement of this statute, resulting in a recent number of groundbreaking settlements, including an $800 million payment by Siemens; a more than $575 million sanction and disgorgement against Kellogg Brown & Root and a $185 million payment by Daimler. With recoveries like this, a potential 30 percent share is akin to winning the lottery for a whistleblower. Under such circumstances, even a loyal employee may find it difficult to turn down such a potential jackpot."

"The Wall Street Reform and Consumer Protection Act approved by Congress and set to be signed into law by President Obama next week contains a whistleblower provision that will have a significant impact on Securities and Exchange Commission (SEC) enforcement of the Foreign Corrupt Practices Act (FCPA)."

"This new provision increases the likelihood that information regarding improper payments will come to the attention of the SEC. Moreover, when combined with recent enforcement actions by the SEC that have held U.S. parent companies strictly liable for the improper conduct of their foreign subsidiaries, the compliance and enforcement risks for U.S. public companies engaged in overseas business activities cannot be overstated.

We strongly urge U.S. companies to take immediate steps to strengthen their FCPA compliance programs and undertake training of their employees and third parties, including agents and distributors. U.S. companies should also be proactive in conducting compliance audits of their overseas operations."

"[Mendelsohn] offered the usual cautionary caveat about it being too soon to know, but he did say the new provisions may create a regulatory backlog because employees now have an incentive to go to the SEC with matters that previously would have been handled internally. 'As a company, you want to have mechanisms for people to report things up the chain internally,' Mendelsohn said. 'The whistleblower legislation cuts against that by incentivizing people to go outside the company with information.'"

It is just not law firms with FCPA practices that have put pen to paper. Below is a sample of what some "whistleblower" law firms are saying.

"Bribery of foreign government officials in international business transactions, and false entries in books and records of those companies within the statute, are the targets of the FCPA. Whistleblowers whose information helps the SEC recover monetary sanctions from those corrupt entities in FCPA cases now have an enforceable right to a monetary award of 10-30%. Based on the increasing number and size of these FCPA cases, the rewards to whistleblowers can be meaningful--as they must be to cause whistleblowers to come forward. Over the past decade, the government has pursued more and more FCPA cases, and some recover hundreds of millions of dollars."

"Some believe that this new provision will have significant impact in the context of the Foreign Corrupt Practices Act, which prohibits companies from engaging in certain practices, including bribery, in foreign countries. Recent settlements by the SEC with international corporations have demonstrated the possibility of FCPA settlements in the hundreds of millions of dollars. Whistleblowers contemplating the new SEC whistleblower provisions of the Wall Street Reform Act will have a huge new financial incentive to come forward with allegations of wrongdoing, in both domestic markets and abroad."

*****

Staying on the whistleblower topic, last week the SEC announced (see here) the award of $1 million to Glen and Mary Kaiser "who provided information and documents leading to the imposition and collection of civil penalties" in an insider trading case. As noted in the SEC release, "this is the largest award paid by the SEC for information provided in connection with an insider trading case." The release notes that the award was pursuant to the old insider trading whistleblower program and further notes that this program "has since been repealed by the Dodd-Frank Wall Street Reform and Consumer Protection Act, which added new Section 21F to the Securities Exchange Act, authorizing the Commission to award bounties to parties who provide information leading to recovery of monetary sanctions in a broader range of cases, not limited as before to civil penalties recovered in insider trading cases."

If indeed the SEC does award whistleblower payments in connection with an FCPA enforcement action, let's hope that the SEC makes such an award known as in the above example.

1 comment:

Why is it that no one is focusing on the conflict of interest aspect of this, that is, most companies' compliance programs include provisions on this subject. Is it not a conflict of interest for an employee to report illegal acts to the government first (in order to collect the bounty) rather than to their employer, who would then be arguably able to address the problem?